Tax Court Serves Big Loss to Waffle House Waitress

by Bruce Givner on March 21, 2012

A Waffle House customer gave five Waffle House employees each a lottery ticket. The ticket given to Tonda Lynn Dickerson won $10 million. When Dickerson refused to share her winnings with the other employees, they sued, claiming the employees had an agreement to split any lottery winnings equally.

An Alabama court held the employees did have an agreement to split lottery winnings. However, because gambling contracts were not enforceable in Alabama, Dickerson was entitled to all of the lottery winnings. Dickerson v. Deno, 770 So.2d 63 (Ala.2000).

Dickerson then set up an S corporation, transferring 51% of the company to her family. She then transferred the lottery ticket to the S corporation so it received the lottery winnings. After an audit, the IRS ruled that Dickerson’s transfer of stock to her family was a gift and assessed her a federal gift tax deficiency of $771, 570. Dickerson appealed to the Tax Court.

Dickerson argued that the stock transfer to her family was not a gift because …

Dickerson and her family had an oral agreement to share any lottery winnings; and

The lottery ticket and its proceeds belonged to the S corporation. Therefore, Dickerson’s family members received the money because they were shareholders of the S corporation.

Dickerson also argued that if the transfer was a gift, its tax value should be discounted based on several factors, including the time value of money and the numerous legal claims made against the ticket holder.

On Dickerson’s first two arguments, the Tax Court sided with the IRS. On the third argument, the Tax Court agreed with Dickerson. The Court held that at the time of the lottery transfer, Dickerson was involved in several lawsuits over the lottery winnings. These lawsuits discounted the value of the lottery winnings because they created the potential for Dickerson to lose a portion of the lottery winnings.

The Tax Court discounted the lottery gifts to a value of $1,119,347.90.